Monday, October 31, 2011

We have hit a wall on responsibility and reward

This is a very stimulating article in New York's City Journal, by a University of Chicago professor, Luigi Zingales, who argues that you cannot look at an economic system in isolation from "who gets what".

The fundamental role of an economic system, even an extremely primitive one, is to assign responsibility and reward. In animal packs, the responsibility of leadership and the reward of mating opportunities are generally assigned to the strongest. In human societies, responsibility tends to take the form of employment, and the rewards are money and prestige. Because physical strength has long since lost its importance, economic systems determine in various ways who receives the responsibilities and the rewards. The dominant criterion in traditional society was birth: the king’s firstborn son was the next king; the landowner’s firstborn son, the new landowner; and the son of the company’s owner, the next chief executive. Most modern societies, by contrast, try to select and reward according to merit. Indeed, surveys show that in the abstract, most people in developed countries agree with the idea that merit should be rewarded.

It isn’t easy to decide what constitutes merit, of course.

On one level, this is obvious. We argue all the time about redistribution and whether the rich should pay more taxes, or the size of the welfare state.

But in another way, it explains why our politics has got so stuck. Just as birth is no longer an acceptable justification for distributing rewards, we have more and more problems over what happens when a market system starts evolving beyond the original set of circumstances which made it work. We have an outworn system of deciding responsibilities and rewards, a constant rerun of the 20th century argument about the role and size of the state.

We are going through another enormous shift in the underlying legitimacy and nature of "who gets what". The answers for an industrial economy are no longer good enough. What if many of the things we value can be produced for a marginal cost of close to zero - and priced more like fresh air or water, rather than automobiles or bushels of wheat?

How do we reward people through employment institutions if employment itself is changing rapidly in many ways - if automation threatens to make any job which can be routinzed as much a matter of history as Summerian fertility gods?

How do we decide merit or productivity if those are intrinsically hard to observe in many knowledge worker occupations, or only one winner of a race of many thousands - such as to develop alternative energy- makes any money?

And to add to the difficulties, merit itself may be increasingly less accepted as a suitable criterion.

Zingales notes that it is often hard to sustain a meritocratic system. Majorities become envious of greater rewards going to a "meritocratic" minority. Moreover, in monopolies and governments, it almost always pays to put loyal supporters into prime positions, not the most creative or productive.

In politics, for example—a field in which value is mostly redistributed rather than created—the benefits conferred by meritocracy are relatively small compared with the benefits conferred by cronyism. If I appoint my friends to office, even when they aren’t terribly competent, I lose relatively little efficiency and gain quite a lot of power. Hence meritocracy is difficult to sustain in government.

The same is true when a firm enjoys a monopoly. Since the firm’s market position isn’t at risk, it doesn’t benefit much from hiring the best people. Instead, its executives focus on bureaucratic infighting, trying to grab an ever-larger share of the profits from one another, and once again, hiring loyal workers pays more than hiring competent ones.

In firms facing stiff competition, though, it pays to recognize merit because survival is at stake. Better a smaller slice of a growing pie than a huge share of no pie at all.

The market system works because it incentivizes efficiency rather than cronyism. and because most people believe the outcome is broadly fair.

If too many people believe that the rewards of meritocracy are not fair, the system can be undermined.

So here's the thing. We have reached an impasse about what constitutes "fairness". Many people do not believe higher levels of taxation for redistribution as entitlement spending is fair. Even if they did, the crisis of the welfare state in Europe and yawning fiscal deficits in state and local government in the US suggest it is not a sustainable idea anyway. One of the problems that Occupy Wall St protestors face is that as they sit shivering in their snow-covered tents in Zucotti Park, the federal government continues to spend vastly disproportionate resources on the elderly. The elderly have huge political power, 20-year olds with no health insurance and heavy student loans do not.

On the other side, many people do not believe that increasing inequality in society is fair. Somehow the world of work and employment and the economy in general is turning into a "winner-take-all" game.

But you still need to reward creativity and skill and merit (however defined) rather than cronyism and court politics. The great overwhelming virtue of a market system is it puts pressure on bureaucracy and status-laden hierarchy and cronyism, that kept the world mired in poverty for thousands of years.

We will never be able to change the current economic system for the better unless an alternative system of rewards is seen to be honest and reward the responsible and productive. The left cannot achieve the change it wants unless it deals with this problem. Income redistribution by the government simply does not meet that criterion. It is stale, It is done. It is over.

And as I keep arguing. you cannot get some consensus on a better alternative system of rewards unless you have a better sense of what the purpose of the economy and society and government is, what the nature of the good life may be. We have to drop the idea of the neutral state, which carries with it the idea of purely neutral allocation by the market mechanism, which liberals of both left and right (libertarians) believe in so strongly.

We cannot progress because our dominant underlying political ideology in the west, liberalism in the broad sense, cannot see there is a problem.

Tuesday, October 25, 2011

More about me

Clearly we need a rethink of how we run the economy and live our daily lives.  Financial catastrophe, lingering unemployment, fiscal breakdown and insecurity are signs not just of mistakes or malevolence,  but exhaustion of worn-out ideas about the economy and politics.

The fundamental nature of the economy is changing, and we have to work out ways to take advantage of it, rather than give up in confusion. Here's  the current running version of my arguments. I call them "Coffee Shop Questions", after where they are mostly written.

I live in New York City. I know economics and markets but am not an academic economist. I cheerfully detest all tribal instincts and groupthink. I am a registered independent.

You'll notice, of course, that I don't have my actual name up on this blog, Why not? Well, I may change that eventually. But for now I feel a lot freer to write what I like, without my name on it.

One reason is I work for a company that advises high-powered investors. I'm paid to know a lot about what is going on in the world in a practical , concrete way. Nothing that I know about or write for the company shows up here, but I think it is better that there is no way to confuse the two activities. No one will find any hints or information which could relate to my day job here. This blog is purely for my own interest and pleasure in trying to understand the deeper trends at work in the world.

The other reason is internet privacy. Many of the people who blog whom I admire more or less do it for a living, or as a major part of their day job. In fact, they use the blog as a primary way to enhance their day job, to bring more attention and build networks and strengthen their reputation.

There isn't much upside in enhancing my career or reputation in my own daily activities, as I want to keep them separate. But there could be some downside to being searchable.

Those other bloggers are also more established, while this is very much a baby blog as I work out my ideas and the readership is very low for now.

Much of what I write is also about drawing connections between different areas of thinking, rather than sheltering within one orthodox tradition. I am very much a "fox" rather than a "hedgehog", as Isaiah Berlin famously distinguished two broad casts of mind. That means the orthodox will find what I say somewhat lacking in rigor, which is fine by me . But I'd rather not have to defend against hedgehogs during the business day as well.

If someday the blog gets more of a following, the pleasure of connection and meeting people would likely outweigh some of the potential downside of being identifiable. But for the time being I plan on being just "Mapper".

Monday, October 24, 2011

"More jobs predicted for machines, not people".

Here's an NYT article about new research about the impact of automation on employment. Two MIT economists have suddenly turned worried.

“Many workers, in short, are losing the race against the machine,” the authors write.

Erik Brynjolfsson, an economist and director of the M.I.T. Center for Digital Business, and Andrew P. McAfee, associate director and principal research scientist at the center, are two of the nation’s leading experts on technology and productivity. The tone of alarm in their book is a departure for the pair, whose previous research has focused mainly on the benefits of advancing technology.

Computers are potentially able to take on characteristics which had been thought of as distinctively human, they say, such as speech or driving.

Google has apparently been successfully operating automated cars on US highways recently, with only occasional assistance from human backseat drivers. This is not good news for truckers in the medium term.

Saturday, October 22, 2011

The Coffee Shop Question restated

It has been too long since I restated the questions underlying this blog. Here is my take back in August.
How do we deal with abundance in the economy so we get the most of what we actually want?
I still think this is a good starting point. The different themes are marinating in my mind as I read different books and articles, but every so often they need to be brought together.
Let's break it down into separate arguments and propositions. (This is much longer than any previous entry.)

What people want

1. Most of our economic problems as a society are not problems of scarcity any more. They are problems of abundance.

We can increasingly produce the goods and services that we want for very little money. Our problem (at least in the west) is not hunger. It's obesity. It's not lack of possessions. It's where to put them.
Some things are still scarce , including energy. And much of the developing world, especially Africa, is still lacking in many essentials. But many of our instincts and ideas, developed over countless millennia of scarcity, are now wrong.

2. Problems of abundance require we have to make skillful choices about what we want.

If the "economic problem " as Keynes called it, is solved and basic necessities are taken care of, we have to think about what we want to do with our resources. Keynes thought the problem of leisure would come to dominate society, based on the bored, frustrated wealthy upper classes he saw at the time. Wealthy aristocracies in the past have generally squandered their wealth on status competition, court politics and war.

3. People increasingly want not more stuff, but more engagement, more purpose, more connection, and more meaning.

They want life to be interesting and varied and stimulating. Why do people pay so much to live squeezed in small apartments in cities like New York or Paris? Because every day is different in a big city.
People want to feel independent. They want to feel connected with others. They want to feel a sense of achievement and satisfaction with their lives.

We have a huge welfare state to provide basic incomes to people.But the recipients people are often bored, drifting, disconsolate and socially isolated. Income or monetary transfers alone are not enough to make people happy.

The failure of our frameworks

4. Most of our thinking on ethics and social science and political philosophy in the last fifty years completely ignored what we want.

Consumer preferences were taken as a given in economics. Liberal political theory stressed the neutrality of the state, and process above ends (with the exception of equality).

Psychology has offered some ideas, including, famously, Maslow's hierarchy of needs. And other issues like enviromentalism have supplied some new purposes, like sustainability. But we don't ask enough what our needs are now that basic material needs are largely satisfied.

Markets and evolution

5. The market system is astonishingly good at generating goods and services consumers want in an innovative and efficient way. But it is less relevant if most of the things we want are not goods and services.

People have a natural instinct to barter and exchange. The whole psychology of exchange has been vastly beneficial over time. Western societies have generally been much better off for being "nations of shopkeepers", rather than looking down on commercial activity as most societies did in the past.

6. The economy is also a naturally evolving system.

The market generates both variation and selection pressure. It creates more and more sophistication and complexity over time, just like natural evolution.

This does not mean we have to be socially darwinian, which has a bad track record. But we have to understand the actual dynamic nature of the economy, seeing it as more of a process than a static equilibrium as in traditional economics.

Government and controlling misbehavior

7. We need an immune system for survival.

Evolution of large creatures is always in a 'red queen' with parasites and viruses, which evolve even faster. And in the same way one of the essential things about an economic or political system is to motivate people not to exploit it or misbehave. Crime is just like a spreading opportunistic infection.

8. Not only is the market exchange and money system very efficient, it also is very good at that kind of incentive and control of defectors.

It contains an immune system of incentives and deprivation of income. But it also relies on many other social technologies to work well, like contract law and money.

9. The growth of the state in the 20th century reflected the evolution of the economy.

Many of the things we wanted as society grew wealthier were not goods and services. Democracy gre in the 19th century as a wealthier middle class wanted participation in decision-making. The welfare state grew above all to provide security (next up the hierarchy of needs).

10. But the welfare state, rights, and entitlements do not have a good immune system.

They also changed incentives in a damaging way, and ithe welfare state is rapidly becoming fiscally unsustainable in its current form. This is partly because the welfare state has trouble controlling defectors, and vested interest coalitions build up to seize a permanent stream of benefits. Liberals hate the idea of the "underserving poor", but without that redistribution is increasingly difficult and government itself is undermined. Political allocation of goods and services has limits as a social technology. Sometimes stigmas are actually functional. Culture matters.

11. As government has evolved away from public goods, it has become more controversial and inefficient.

Government was originally about defense and other public goods (such as roads, harbors or the mail). Big government was the new tool of the 20th century, to deliver income security and medical benefits. Redistribution and provision of a social safety net scaled back the operation of the market in society. Much of the political debate in the last thirty years has got stuck on the size of the state versus the market.

Employment, Jobs and Work

12. The pace of change can outrun our ability to deal with it.

Productivity is going through a major acceleration again. Much of the routine jobs in society may disappear. But social technologies take time to adapt and compensate.

13. It may also outrun our ability to create new jobs.

In the past, technological change destroyed old jobs but created many new ones. 95% of people used to work on the farm. Now in developed countries like the US less than 5% do. Manufacturing grew, and then the service economy. There are more people employed than ever.

But this latest wave of change may not create new jobs in the formal economy, because we do not want more traded exchanges. Money can't buy you love, as the song goes.

14. The new goods and services that we enthusiastically embrace don't employ many people, and are often given away free because the marginal cost is so low.

Apple is the most valuable company in the world, but does not employ many people. It employs even less if you count out the retail stores. Many people are employed producing iphones and macbooks in factories in China, but even there, the manufacturing company is planning to automate most of the production.

15. This is a major problem because jobs are the bedrock of the market economy.

We have known for decades that GDP is not closely related to happiness or social welfare or sustainability. The reason that we still persistently care about GDP data so much is because it is closely linked to availability of jobs.

Jobs are far and away our source of income, and we need income to survive. Jobs define much of people's identity and provide (at least in better jobs) much of their sense of purpose. But the whole notion of the paid job in the formal sector could be in trouble.

Income, Wealth and Assets

16. The problem is we think primarily in streams of income, rather than assets and ownership structures.

Ownership and property are both social technologies and institutions which constantly evolve. We used to have a feudal system in the west, with grants from the monarch in return for services owed. Land used to be the primary form of wealth and ownership. Communal forms such as monasteries and colleges owned much of the land. Precious metal was the primary form of liquid wealth.

But we have created new kinds of assets - joint stock corporations and equity markets, paper money, fractional reserve banking, Financial markets display far too much ingenuity for their own good creating new kinds of assets and legal structures, such as credit default swaps or esoteric options.

17. Many of the valuable things in society are increasingly intangible, with very low marginal costs.

Many of the most important assets in the economy are intangible altogether, like human capital, organizational skills and culture, or patents.

Capital is not factories any more, so much as knowledge. But knowledge is very different from tangible ownership. It needs skill and education to acquire, but it is easily replicable, transferrable and non-rivalrous.
18. We get confused about assets and have serious problems with asset bubbles and ownership.

The whole nature of the economy is changing as it is driven more by the balance sheet - valuation of assets - rather than the flow of income - GDP. We get increasingly serious booms and busts like the housing bubble. An asset-based economy is driven by expectations about the future, the discount rate (interest rates) of future events, emotions, risk and psychology. Our legal system is getting mired and blocked up dealing with patent litigation, copyright and intellectual property.

19. The changing nature of assets means we need to rethink what wealth is.

We need to think about what wealth is in a substantive sense rather than simply an accounting total. If you have one hundred million dollars in the bank, you are obviously regarded as wealthy. But what does it mean to your life? What can the wealth get you? How do you recognize wealth?

Of course it means the ability to buy luxuries or property. But that is less of a differentiator than it used to be. Every secretary in Tokyo can get her Hermes handbag. It is hard to recognize variations in wealth from clothing on the street any more. Everyone has access to latest technology and trinkets, like the new iphone. Wealthy people do not even necessarily have larger apartments or houses, even if the address is better. They just live in the Upper East Side or Kensington, rather than Crown Heights or Peckham.

Changing relative prices

20. Many of the historical changes in society are driven by changes in relative prices.

There are long-term variations in inflation, the price of land or commodities or labor, the terms of trade between manufactures and commodities, the price of different kinds of energy, and may others. Current economic changes are also driving deeper relative price changes.

21. Deflation is already taking care of much of the basic needs of society, with the exception of real estate, education and medical care.

The rising cost of university education in the US is squeezing the middle class, and the rising cost of medical care is having an increasingly devastating effect on other areas, including fiscal policy and disposable wages.

Time, Work and Leisure

22. The thing that is most scarce is time.

There is never more than 24 hours in a day. Yet we mostly squander it. We have deeply confused ideas about work and leisure. The relative cost of leisure compared with another hour of work rises as wages rise. This perversely means people are working more, driving up asset prices more, and have less time to use the things they buy.

23. Working hours are surprisingly inflexible.

People have little choice about the number of hours they work. The full-time job of 35-50 hours a week is still the core feature of most people's lives - all the more so as women moved into the labor force in the past fifty years. There is surprisingly little scope for trading off more income for more time. This is partly because it is often more efficient for employers to spread fixed costs such as benefits or office space over fewer people working longer hours. But it also reflects that our social institutions surrounding work have failed to evolve much.

24. You need some skills or education to make the most of leisure.

Few people find doing nothing at all attractive for long. More leisure time is not attractive for many if it just means more time slumped in front of the tv rather than more money.

What is the economy for?

25. We need a positive vision of human functioning, a teleology.

We need to go back to a more Aristotelian view, in which we can say some ends are better than others - at least for purposes of setting up society to further them. There is a common human nature, even if it is expressed in different religions or ideologies. Of course, people differ in their natural personality, traits and inclinations, So we always need much complexity and diversity and intricacy. But they differ within a range.

26. There is a great deal of common ground on what makes people flourish.

People have different ideas and wants and beliefs and ends. But modern liberalism has exaggerated the differences. There is a common core. And it is about more than just provision of basic means, like Rawl's primary goods. It is about more convergence on ends.

One of the most interesting things about recent work in positive psychology is it offers more unified, coherent evidence on what makes people satisfied, engaged and happy. We can move closer to ends, even if we do not specify them, instead of just focusing on providing general purpose means like money. We may never agree on people's beliefs, or theological systems, or particular cultural references for individualism or group cohesion. But we can agree on a core of practical things that help people flourish.

27.The purpose of the economy ought to be to stretch and engage people, to allow them to develop themselves, to offer stimulation and joy.

It already does much of that - as a byproduct to providing goods and services. The economy is steadily evolving to provide more engagement and stimulation. A city like New York is a vast buzzing kaleidoscope of stimulation. But we need that to be the primary aim, not to generate income to pay for market exchange of goods and services. Our intermediate objectives are increasingly leading us astray. We need to refocus on the goal itself.

New social technologies

28. The problems in the economy are not ones of scarcity. They are problems of worn-out social technologies.

Ways to cooperate and work together evolve, just as cars or microchips do. Over time, we generate new social technologies (or institutions in the broad sense). Development economists have come to realize that the main obstacle to growth in poorer countries is not actual technology or physical capital - like building factories or highways - but institutional flaws like corruption, kelptocratic government or poor protection of property rights. In the same way, in the developed world the main challenge is institutional. Many of our institutions and structures, like 20th century bureaucracy, traditional managerialism and the welfare state, are now obstacles.

29. Market prices do not capture many of the things we want.

The market will always be an important arena and social technology. But as goods and services become less of a primary aim, the market and monetary exchange ought to become less of a primary institution as well.

30. New social technologies are rapidly evolving. The software underlying the economy's hardware is rapidly being rewritten.

Examples include open source production of goods and services (like Wikipedia). and the astonishing availability of knowledge on google. The real significance of social networks or twitter may turn out to be they evolve into new ways of coordination, cooperation and participation.

Some actual technologies become social technologies, if only by displacement. Television is often a social technology for passivity and passing time.

Religion is a vastly important social technology. But it has come to play a much less central role in the west, which creates many social gaps.

31. We need new and better social technologies for our current concepts of income and wealth.

We need an institutional "land reform" to make the new economy work. People should have some assets as a matter of membership or citizenship. But we need strong incentives and ways to control defectors, or the system will rapidly lose all legitimacy.

That means proportionately less will flow through market exchanges. But this does not mean more should flow through government. This does not mean a "third way" 1990s style, with a mix of market and government solutions. It means something new, a rethink of assets and how we measure them.

32. We need new social technologies for the 21st century to help people flourish and stretch their skills.

We need new incentives for people to acquire skills and education and stimulation. Some may not be interested, or want to engage with anything. We need to understand people's preferences and choices when they have freedom much better.

33. We need to orient the system away from more provision of goods and services and towards more provision of stimulation and purpose and meaning.

We also need a more concrete sense of what the economy should deliver - the boundary of utopia. We need to focus on what it means for daily life. What would an ideal day be like? And how do we get more of them?

And that will do for today! The coffee is drunk, the table is vacated and I am about to press upload at home. I will gradually refine, rewrite and hone this in the future.

Friday, October 21, 2011

The future arrives

This is a fascinating look at what Apple had in mind more than 20 years ago. The article links to an Apple concept video, "Knowledge Navigator", of a university professor organizing his day in about 2011. It was produced in 1987.

He uses a tablet computer with an assistant like the new Siri, video chat like FaceTime or Skype, and knowledge search on the Internet.

It shows how long ideas can germinate before the underlying technology catches up. Apple was too early bringing out its Newton handheld device in the 1990s, which became a bit of a joke.

Nobody is laughing at the iPad or iPhone.

The video is also fascinating as an example of how we think about and imagine future alternatives for daily life. It was so far- sighted, but also so traditional. A professor in nice house thinks about his class later that day. Very ordinary.

AI may be the next major wave which sweeps through technology - again, after previous bursts of enthusiasm for it decades ago. I remember a huge burst of interest and apprehension about the Japanese "Fifth Generation" computing project in the early 1980s, which went nowhere at the time. It would seem strange to those researchers back then that we would be excited by a software assistant that can send a text message for you. But we are.

IBM's Watson project is another recent example where a computer can now interact with people - in this case, play tv's jeopardy game.

The technology may now be maturing enough to make daily AI viable, with potentially huge impact on the workplace and the economy. Siri already seems to be the first AI product to be a major mass market hit. I haven't used it yet myself. But it feels as if it may be a rubicon of sorts.

Change of Pace Photo

The TransAmerica building in San Francisco and the moon, last week.

Monday, October 17, 2011

Purpose - or engagement?

I argued here that the problem with the economy was not shortage of money or goods, but shortage of purpose. Maybe that needs to be rephrased as a shortage of engagement? Or of the right kind of stimulation and novely?

Satiation and satisfaction

I'm discussing Tibor Scitovsky's book The Joyless Economy: The Psychology of Human Satisfaction.

One of the most crucial questions to ask about our current economic situation is whether many of the needs we have can be satiated. When is enough enough?

Can these desires be satiated? One important question is whether people tended to focus on their position in the pecking order, or positional goods which by definition cannot be spread wider or satiated completely.

Scitovsky doubts this. He thinks that many kinds of desire for status and accomplishment can be satisfied, so long as it does not mean people just want to rank themselves on a one-dimensional scale. There can be many different sources of achievement and accomplishment that can bring recognition and respect from others, covering all sorts of micro-niches:

Thanks to the great multiplicity possible in such aims and the standards set for them, full status satisfaction in such form is within many people's reach. By contrast, when people seek status not in other people's recognition of their specific accomplishments, but in a general token, like income, which is supposed to express the value society places on their services, then status becomes a matter of ranking on a one-dimensional scale, and the seeking of status becomes a zero-sum game.

The big problem is we have increased the channels of stimulation, but not so much the content or the quality.

Technical progress, by freeing more and more time from work, increases man's demand for stimulation. The economy has responded by increasing our means of access to sources of stimulation, but it has failed to increase their stimulus content. For the source of stimulation and satisfaction is not the TV screen, the automobile, or the store, but the novelty to which they give access.

In many ways this is an optimistic thought. There is much scope for economic advancement and growth simply by increasing the quality and amount of genuine novelty and stimulation.

Fashion, of course, has always thrived on the right amount of novelty and proved endlessly fascinating to many women as a result, and Scitovsky sees much to praise.

Fashion mongering may seem wasteful, but the human need for variety and novelty is as legitimate as the desire to survive.

Formulaic approaches quickly get tired, however. Hollywood and the television sitcom need to come up with genuinely new stimulation and novelty, or people get bored.

Criticism of the American Way of Life

One cautionary note about Scitovsky's book, though. The psychological framework in the first part is immensely convincing. It just seems intuitively plausible. But he then goes on to a criticism of many aspects of American culture. Some of these sound dated, like his arguments that Americans do not bother to shop on the basis of price, or never complain in restaurants. Others sound to a contemporary ear a little crankily liberal. He blames America's puritan inheritance for its interest in bland food and suspicion of enjoyment.

One irate reviewer on Amazon says the whole book is a Carter-era throwback.

It isn't. It has much to say about the future. But the fact the later sections of the book are more controversial ought not to invalidate the earlier sections.

I am not wholly sure how much to rely on the psychology in a book which, after all, is more than thirty years old. I will have to look into contemporary takes on this. But what I find invigorating about this book is it unites several stands in my overall quest here.

It links time and bandwidth to larger changes in the economy and its evolution through different stages. It gives some sense of purpose and desire - people want the right balance of stimulation and comfort - and explains why. It suggests new pathways for the economy to develop, both new ways to find complexity and stimulation, new needs - more education to appreciate more kinds of stimulus - and new needs to keep stimulation calibrated at the right level. It explains some of the attraction of the arts - the right degree of bewildering novelty.

And it also explains what happens when people do not have the skills or education to benefit from these changes. People take refuge in low-skill, low-engagement activities like shopping or tv. Whenever there is a riot on tv, the reporters always seem to find youths who claim "there's nothing to do round here".

The future is new forms of flow.

The 53%

Here's the other side of the debate - "I am the 53%" (based on the percentage of the population who pay federal income taxes.) People who have worked hard and sacrificed and taken responsibility for themselves do not see why they should support hippy anarchists with their taxes.

It comes down to the old issue of the deserving versus undeserving poor. There is limited appetite in much of society to support those who did not act responsibily.

The range of people's satisfactions

I was just discussing Tibor Scitovsky's book The Joyless Economy: The Psychology of Human Satisfaction. He argues that the right level of stimulation is critical for both personal and societal satisfaction.

So how does the economy fit into this psychological analysis? Of course, the market economic system is useful because it helps ensure reciprocity in trying to satisfy people's wants through production of goods and services.

For the need to pay a market price makes the recipient of a satisfaction perform a service in exchange or otherwise contribute to the satisfactions of others ... reciprocity in the rendering and receiving of satisfactions is the main function of the economic system.

But so much lies outside the market economy - vast areas of activity which matter to people's satisfaction, but to which economists pay little attention.

Scitovsky distinguishes six main sources of satisfaction in all. We already talked about the largest one- mutual stimulation and pleasure in one another's company.

One of the other main sources of stimulation is work itself. But we do not account very well for it, Scitovsky says, neither its negative nor its positive aspects.

Those effects of work are completely missing from the economist's numerical index of economic welfare: the net national income or net national product is not net of the disutility of the labor that went into producing it, nor does it include the satisfactions of labor, if this is what work gives rise to. ...Modern economists have nothing to say on whether work is pleasant or unpleasant. "

This is just one more of the dozens of reasons why GDP measures are incomplete or misleading.

Economic quantification is attractive and useful, but we must not let it seduce us into attaching more significance to the measure of quantity and to what is quantified than they deserve. The national income is, at the very best, an index of economic welfare, and economic welfare is a very small part and often a very poor indicator of human welfare.

In fact, how much we enjoy work has immense consequences. For example, it helps explain why working hours have often got longer, not shorter, as incomes rise - contrary to the expectations of many people in the 1970s. A rise in wages raises the price of leisure, because the cost of spending an hour of leisure rather than an extra hour working becomes higher. So there tends to be a substitution effect away from leisure, unless as income rises you want to spend more of your income on it.

When work and leisure are considered the only uses of time, and both are assumed to be pleasant, there can be no income effect, because money cannot buy more time. The substitution effect, therefore, would be the only effect of the rise in earnings, which would then necessarily lead to a lengthening of the work week.

Increased specialization can often increase the boredom and monotony of work, however, so it gets complicated. Much depends on the nature of work itself. .

Non-market goods and services - housekeeping, cooking, cleaning, looking after relatives, advice to friends - are also an immense area of activity which give people satisfaction, even if they do not flow through a market transaction.

He also identifies two other categories - self-sufficient satisfactions and externalities.

The takeaway from all this is that our standard economic way of looking at things only sees a small part of the wider range of people's satisfactions. But those other stimulations and satisfactions become steadily more important, as comfort levels rise to a level where basic wants are satisfied.

"We are the 99%"

I was reading the website for "we are the 99%" earlier. Much of it is genuinely sad and moving. Many people are struggling, often through no fault of their own.

I think this general sense that things have gone very wrong even for the most sympathetic, deserving cases underlies much of the sympathy that many people feel for the idea of protesting the state of the economy. If you are young and have no job and debts, no wonder you are frustrated.

That is prior to any more fringe or anarchist tendencies there may be in specific places like Zucotti Square. In fact, I wonder whether some fringe movements will get a free ride on much more mainstream sympathies.

Based on a subjective reading , it appears the two biggest problems on the site are education costs and medical bills.

  • Education costs: the spiraling cost of education and the crushing burden of student dent associated with it. It just seems wrong that education costs have got so out of control. And the fact that student debt almost uniquely cannot be discharged in bankruptcy seems outright crazy
  • Medical bills: The lack of insurance or problems with insurance underlie the broader failure of the medical system. America has a crazy halfway house between public and private provision, which delivers out of control medical costs. Medical bills are strangling companies, federal and state fiscal policy, and wage growth

I don't think anyone can reasonably deny that there are serious problems in these sectors. But is it really the fault of the plutocratic 1%? Both sectors are heavily regulated or involved with government. Universities are renowned as fortresses of liberalism, or even outright leftism. Education is filled with union influence.

And Medicare and Medicaid dominate much of medicine.

That said, the existing US private medical system simply does not work, whatever some conservatives say. It is deeply inefficient. It encourages competition not on the basis of innovation or quality, but removing people from the insurance pool. It is riddled with excessive tests and defensive medicine. partly because liberal trial lawyers function in much the same way as tape worms on the larger organism.

Still, looking at the overall site, it does not seem to be a protest about inequality as such, despite the title, so much as distress that some absolute standards are harder and harder to maintain. The middle class and educated young are slipping.

"The Joyless Economy" and the right level of stimulation

I want to talk about another take on the economy. This one is an older classic. Tibor Scitovsky was a well-known and respected economist, especially in the field of welfare economics. I knew the name from college, but I'd never read (or been aware of) his book  The Joyless Economy: The Psychology of Human Satisfaction, which he pubished in 1976, until I came across it a few weeks ago. 

I think the book has been regarded as an interesting (if eccentric) curiosity in mainstream economics, an early attempt to incorporate psychological insights into the discipline. But its wider influence on the  subject was minimal. 

The book is fascinating, however. He focuses on peoples' motivation and drives, arguing that a need for stimulation, pleasure and comfort explain much of consumer behavior - and have been completely ignored by mainstream economics. The mainstream, as we have seen, pays little or no attention to consumers' preferences.  

Scitovsky argues that instead of economics' sweeping assumption of rationality, psychology has real, substantive, experimentally-validated scientific evidence. Psychology is more scientific. So the psychology of human motivation and satisfaction is where he begins.

The central idea is that people have an optimum level of arousal of their mental activity. Too much stimulation and we become anxious and nervous. Too little and we become bored and irritable. 

Indeed, psychologists postulate the existence of an optimum level of total stimulation and arousal, one which is optimal in the sense that it gives rise to a feeling of comfort and well-being.  

This can be grounded in neurophysiology, he says. 

Interestingly, in many ways he anticipates here what Milhaly Csikszentmihalyi later says about "flow", the mental state where you are challenged in a task at exactly the right level, so that you are absorbed and often lose track of time altogether. Much of the satisfaction of work comes from those moments of flow, according to more recent positive psychologists. 

It isn't just a matter of individual satisfaction, either. Scitovsky in fact thinks optimal stimulation is even more important to society as a whole. Indeed, 

Civilization consists in originating stimulating activities other than violence and back-breaking labor, developing the skills needed to exercise and enjoy those activities, and making available the education needed to learn the requisite skills and discipline.

There is one other central element in his psychological account. Changes in the level of stimulus is extremely important, as well as the level. "Comfort" is the level.

We saw that while comfort hinges on the level of arousal being at or close to its optimum, pleasure accompanies changes in the level of arousal toward the optimum.  

This is a familiar story to everybody. Undertaking a task, playing a game, or confronting a problem  produce increasing tension, and then achievement of the goal resolves  the tension. 

It also means that too much comfort can mean little or no pleasure. Some measure of discomfort or effort must usually precede pleasure. 

There are some other consequences of his analysis. It means people have only so much ability to process the new and unfamiliar before the stimulus/arousal level gets uncomfortably high. So there needs to be a certain amount of redundancy (i.e. familiarity) in new information for people to enjoy it. Too much unfamiliarity produces bewilderment or irritation, not pleasure. 

That is why so many sources of stimulation need some education or skill. Enjoying a game of tennis requires being able to play at a reasonable level, and with a well-matched opponent. The ability to appreciate art or literature or most music requires knowing a little about them first.  

This is why the uneducated and the poor find it so difficult to deal with boredom, and often incline, he says, to alcohol or violence or aggression to seek stimulus. 

But it is not just the poor who have difficulty finding things to engage their attention, either. Americans in general love time-saving devices. Yet much of the time saved in recent years goes to watching television - which people report generally does not engage them very much. 

In fact, I find this idea of optimum stimulation very persuasive. Often come Friday, I feel "brain-fried" with limited ability to take even more stimulus after a week in the city.  It takes a glass of wine and a few hours down before we are ready to go again. 

It also explains why we find the city so alluring. He argues for the importance of novelty.

The yearning for new things and ideas is the source of all progress, all civilization; to ignore it as a source of satisfaction is surely wrong.  

And here is where what he says is so directly related to the questions underlying this blog.

What does an organism do when all its needs are satisfied, all its discomforts eliminated? The original answer, nothing, is now generally recognized to have been wrong. Perfect comfort and lack of stimulation are restful at first, but they soon become boring, then disturbing. At that stage the organism actively seeks stimulation.  

In an affluent society, most basic needs and wants - food, shelter, even air-conditioning when it is hot and humid - are taken care of. The level of comfort is high.  

So most people's satisfaction comes from stimulus, not comfort . Indeed, we know from other psychologists that we tend to get habiutated to a certain level of comfort, or particular circumstances. 

But what is the main source of stimulus for us?  It is other people.

Stimulation comes from change, variety, surprise, novelty-and most of these originate in human action and imagination. Moreover, we are most stimulating to others when we are stimulated by them.  

And stimulus is not necessarily scarce, either. It is generally, Scitovsky says, a non- exclusive or shared satisfaction. It actually benefits from participation of more people.

So what does this mean for the economy and future growth?

Tuesday, October 11, 2011

Change of Pace Photo

Our little town. New York may not seem as uniquely impressive as it did ten or fifteen years ago, before Shanghai and Dubai sprouted new skylines. But it is still quite a sight.

This is looking south, with Manhattan on the right.

Controlling defection and deviance

I was talking in the last post about Stanford professor Robert Sutton's book The No Asshole Rule: Building a Civilized Workplace and Surviving One That Isn't. He says assholes are never worth the damage they do to a company, and should be changed or expelled.

This forcibly brings up the issue of how you encourage cooperation between people, and control deviance.

I discussed in an earlier post how the left tends to frustrate its desire for egalitarian social progress in practice, by refusing to deal with those who exploit or leach off society (unless they are "the rich" or "bankers").

The left/ liberal demand is to be 'inclusive' no matter what. Deviance is often explained away by structural forces or societal neglect, with little role for individual responsibility. Criminals or potential terrorists must be appealed to , and a perfect example must be set by society at large before deviants can be expected to comply. Equality is all.

This drives much of the right nuts. They believe breaking the link between individual behavior and consequences undermines the culture and demoralizes society as a whole.

Any society needs a way to deal with deviants. Not everyone can be 'included'. Some people must be "left behind,", or at least held responsible for their own actions.

How we treat the less powerful

However, the Sutton book also rightly argues that one of the best indicators of civilization is how the more powerful treat the less powerful in society. If you regularly "kick down", you are likely an asshole yourself.

And that produces a strong political force as well - a desire to be compassionate and 'just', a feeling that people should not be mistreated just because they are disadvantaged, or less educated, or less skilled. The underdog must not be kicked too much.

You want to control selfishness and deviance without becoming selfish and deviant yourself.

The trouble is I think these two instincts, responsibility and compassion, get confused or at cross-purposes. As the asshole example shows, the deviant and selfish can often be more powerful than their targets.

In fact, as Sutton discussed, more power tends to make people behave badly. Power corrupts. That applies just as much to union leaders or trail lawyers or big media as corporate CEOs or senior bureaucrats.

Sometimes the less socially powerful can also be very powerful in a small-scale, tyrannical way. A gang leader may not have the formal power or respect in society as a whole that a Senator or CEO does. But he may have more actual power of life and death over his followers, and more power to inflict unhappiness and mayhem and damage on an area.

An imam might be part of an unpopular immigrant minority. But he may also participate in forced marriages or even turn a blind eye to honor killings.

The less powerful may also be genuinely less deserving. In the standard liberal view, everyone has equal rights, and their personal history is not relevant. But what someone has done with their life and the opportunities they actually have has to mean something as well. Someone who chooses to devote their lives to crystal meth or cocaine should not get as much respect - or help - as someone who is in trouble because they have fallen sick or are injured.

Power is on a different axis than deviance. The powerless and poor are not simply because of same that fact also admirable and just and deserving.

The impulse to be very careful and suspicious when the powerful want to control the less powerful is a noble one. But "compassion" in that case can also produce social damage.

Compassion for criminals and excessively sensitive policing can condemn whole neighborhoods to be terrorized by drug lords and petty thieves instead.

Detoxifying the brand

I was partly thinking about this because I read an article the other day in the UK Telegraph about the Tory party conference in the UK. Even now, twenty years later, it claims the Conservatives still have to "detoxify" their brand. They had come to be seen by the mid-1990s as the mean-spirited, nasty party, which partly led to 13 years of Labour government.

It is very dangerous for politicians to find herself portrayed as "mean-spirited." But at the same time, society as a whole will not trust politicians who fail to deal with social problems, or believe the only answer is more government involvement and more resources.

No-one should be excluded or treated badly just because they are less powerful or influential. But people should be excluded if their behavior is irresponsible or wrong or evil. Too much value-neutrality undermines this.

The best way to deal with deviance and irresponsibility is to discourage it in the first place. Culture and socialization and moral expectations ought to deal with most of the problems long before actual sanctions are necessary.

We clearly do not want petty tyranny.

But you do have to impose some expectations at some point, or the cruel and spiteful and criminal will prevail.

Sutton says that one reason it is so important to deal with assholes is that they tend to hire people like themselves. They "breed like rabbits", he says, and the poisonous atmosphere causes other people to become assholes too, if only in self-defense.


Being civilized in the workplace

So here I am at 38,000 ft over Utah, flying out to San Francisco. I was reading Robert Sutton's The No Asshole Rule: Building a Civilized Workplace and Surviving One That Isn't.Despite its quite aggressive title, the author is a Stanford Professor who has studied the problems caused in organizations by the selfish and tyrannical.

No matter how productive an asshole is, he says, you need to change them or get rid of them. They poison a culture and cause more problems than they are worth.

He gives two keys for recognizing an asshole. The first is, after an encounter with the individual, does the 'target' feel "oppressed, humiliated, de-energized or belittled" by the person? Does the target feel worse about him- or her-self?

The second test is how they treat those with less organizational power than themselves. Do they consistently aim their venom at only their subordinates, and "kiss-up/kick down"?

Everyone can be an asshole every now and then. The issue is people who are nasty and venomous as regular character traits. And the answer is not to replace them with wimps and clones, either.

I can think of one particular asshole where I work, as most people can. Fortunately, I hardly ever have to deal with him, and have made it clear I never want to. So I don't suffer on a daily basis.

But so many people do suffer because of this petty nonsense. Sutton cites research that about a third of workers in Western countries have to deal with an asshole at a point in time. And few things are more destructive of job satisfaction, daily happiness, and ability to sleep at night.

Making societal progress often comes down to making small changes that improve the texture of daily life.

People need some sense of purpose in their lives to feel happy. For many, at least some of that sense of purpose and challenge comes out from their job (even if it is a mistake to base all your aspirations on a job).

So looking for ways to identify and reduce petty tyranny is more than just a matter of workplace productivity or saving money. It's essential for making progress work for us. It is certainly more important, if you think about it, than another 3% wage growth or consumer spending in a particular year.

Human nature will always be with us and some people will always be assholes. But more cultural intolerance of such petty tyranny is a very good thing.

The step-off- the-plane test

I'm sitting here at JFK for an early morning flight. I still find it remarkable that you can sit on a plane for a few hours ..... and step off the jetway onto a different continent, into a completely different context. (G loves to tease me about feeling this way.)

But it is a routine miracle of daily life, beginning in the 1960s.

I'm heading for the west coast today.

Fifty years ago, that would have been a four day trip by rail. One hundred fifty years ago, it would have been six months around Cape Horn and the worst ocean storms in the world. Now I can complain about the airline pretzels instead while I watch the midwest roll by beneath my window.

I've been thinking about recent arguments that we have not seen much technological progress in the last three decades in daily life - with the huge exception of computers and the Internet.

This flight today will take just the same flight time as 1970, and counting in having to arrive earlier at the airport for security reasons the journey will actually take longer.

Of course, the ticketing and reservation systems have changed. Travel agents are mostly a memory. The pilots carry their charts in iPads. Efficiency has been upgraded in so many ways.

But economy class seats have not.

The availability and variety of products has grown enormously since 1970. Try finding arugula or szechuan peppercorns in a supermarket back then. We have three hundred channels on tv instead of three.

And perhaps we travel more frequently than we did. I was in this very terminal less than ten days ago going to Miami.

But if you look around at the streetscape of New York, it does not look as "advanced" to visitors as it did in 1970. Cities with a fraction of the income, like Shanghai, have a towering skyline. Dubai was pretty much a dusty fishing village in 1970 and now has its own array of glittering towers and overflowing malls.

How do we recognize a place is wealthy or advanced now, at first glance as we step off the plane?

Part of it is orderliness. The streets are clean, the subway works, the police aren't corrupt.

Part of it is aesthetic appeal. Wealth surrounds itself with beauty and culture. We were sitting in Bryant Park the other night at twilight and it was just lovely, as the light slowly faded on the surrounding buildings and the evening air was fresh. In second-tier places you get ugly concrete slabs and miles of bland or unimaginative housing.

Part of it is culture. I was at the Metropolitan Museum yesterday, that vast treasure house, and saw their exhibition on Indian Painting. (Worth seeing).

Part of it is education. New York has its world-class universities and intellectual fireworks.

But it is not as easy any more to tell how wealthy somewhere is just by stepping off the plane and looking for superhighways or a skyline.

Monday, October 10, 2011

Think about assets and wealth, not income and equality

W. Brian Arthur says that the basic economic issue is shifting from producing prosperity to distributing prosperity.

I'm not sure it's a matter of redistribution or transferring income, an argument for the welfare state. Instead, it is an issue of ownership rights and property rights. It is about the legal obligations and claims that people have.

It is already more difficult to apply many of our current legal approaches to new circumstances. Look at the way patent conflicts are breaking out in the tech world, for example. Far from enabling prosperity, the legal system is stifling it.

Nor can it be like 19th century robber barons who saw their own property rights as almost limitless, regardless of the impact on others, and who saw freedom of contract as the most important right. Henry Frick cannot be the face of the future.

We need a new social technology to complement the market.

Progress may require a new concept of citizenship and membership in a society. It isn't enough to redistribute on the basis of fairness without thinking about who deserves what.

You need equality to the extent it promotes freedom and opportunity for the maximum number of people. But this does not entail an equal right to common wealth. That still has to involve some measure of contribution or membership or merit, some sense of the concrete story behind a person.

That may sound like John Rawl's difference principle, where inequalities are justified only to the extent they raise the income level of the worst off, which is at the heart of contemporary liberal political philosophy.

It isn't. This is not about reluctantly tolerating inequality for the sake of incentives. It is about lifting the veil of ignorance (the famous device in Rawl's A Theory of Justice: Original Edition) and asking what people ought to get.

That goes against the grain of liberalism, which tends to look at dollar income (or dollar wealth) alone. Liberalism has a blind spot when it comes to people's preferences.

A better way forward is likely to be through a closer look at ownership and asset endowments, not through equality or economic rights.

Assets and Wealth

The main challenge is not the distribution of income, nor equality of rights, but the distribution of assets and how that evolves over time.

We have to make value judgements about assets.

We should think more about what assets people own, not just the stream of income they get from the labor market.

What assets do people currently own? Money, for sure, and investments. Real estate. Claims on future streams of income like pension rights. Human capital such as education and skills.

We have to move from looking at household cash flows (income) to looking at household balance sheets (wealth). We need to ask better questions about what wealth is.

I think there needs to be enough income flow from assets to meet people's basic needs. But it is very difficult to do this without degrading or destroying key cultural institutions, as I discussed here.

Across-the-board welfare rights or minimum incomes are not the answer. The welfare state does not work. It may be that money transfers just are not suited to this at all.

So here's the questions. How do you redistribute or reconfigure ownership towards those that deserve it? Who deserves it? And what do we do with people who don't deserve as much? What is wealth?

These questions have been almost impossible to pose, let alone answer in recent decades, because the immediate objection is you would be making some people into "second class citizens."

Sunday, October 9, 2011

Birth Pangs?

Walter Russell Mead's post on the W Brian Arthur essay is itself very interesting.

As a species, we will spend less time in the coal mines and more time in the theater, less time chopping cotton and more time writing novels.

Reshaping our social institutions and our mental habits to capitalize on the vast and unprecedented opportunities of the information revolution is going to take a lot of time, energy and creativity. The pain and drama of the shift will absorb our political system — and painful as it will be in the US, it is likely to be still more disruptive and difficult elsewhere.

But unless we get it profoundly wrong, these are birth pangs, not death agonies. The millennial generation will build a new world, and it will be an extraordinary place.

The problem is most standard analysis just isn't coming to grips with this. It is a tremendously exciting opportunity, but much can go wrong. The industrial revolution produced dark satanic mills for a century, and enclosure of the land, and faceless bureaucracy, and slag heaps, even as it transformed humanity's chances vastly for the better.

Even the most marvelous cures can have side-effects.

It is important to have hope when the economy is looking so overcast and gloomy. European banks are still tottering on the brink. But I think this is something the invisible hand of the market alone cannot deal with. It needs purposive intelligence as well.

The Second Economy

Here's a fascinating essay by W. Brian Arthur in McKinsey Quarterly (via Walter Russel Mead). I've read Arthur's book, The Nature of Technology: What It Is and How It Evolves which was excellent. Here he turns to the future.

With the coming of the Industrial Revolution—roughly from the 1760s, when Watt’s steam engine appeared, through around 1850 and beyond—the economy developed a muscular system in the form of machine power. Now it is developing a neural system. This may sound grandiose, but actually I think the metaphor is valid. Around 1990, computers started seriously to talk to each other, and all these connections started to happen. The individual machines—servers—are like neurons, and the axons and synapses are the communication pathways and linkages that enable them to be in conversation with each other and to take appropriate action.

It could lead to a much more productive and wealthy world. But the consequences for jobs could be serious. He argues the primary cause of downsizing since the 1990s has been that jobs are disappearing into the "second economy", i.e. the digital economy.

This suggests to me that the main challenge of the economy is shifting from producing prosperity to distributing prosperity. The second economy will produce wealth no matter what we do; distributing that wealth has become the main problem. For centuries, wealth has traditionally been apportioned in the West through jobs, and jobs have always been forthcoming. When farm jobs disappeared, we still had manufacturing jobs, and when these disappeared we migrated to service jobs. With this digital transformation, this last repository of jobs is shrinking—fewer of us in the future may have white-collar business process jobs—and we face a problem. ...The system will adjust of course, though I can’t yet say exactly how.

This is exactly the question at the heart of this blog. Arthur even goes on to reference Keynes' Economic Possibilities for our Grandchildren.

He has a few brief thoughts about the way forward. Maybe a major new source of jobs will be discovered, he says. Maybe we'll take more leisure time. Maybe the very idea of a job and productivity will change in important ways.

In some ways, Arthur isn't adding anything new here. Everyone can see productivity trends and automation are causing more problems for the traditional economy, and the pace of change is so fast that even if new major sources of jobs do arise, the adjustment is abrupt and wrenching. the question is what we should do about it. But at least he is asking the question.

It is actually remarkable, when you think about it, that such a distinguished researcher drom the Santa Fe Institute, publishing in a McKinsey periodical does not have a clearvsense of the way forward. It just shows how much needs to be done.

His metaphor that the economy developing a nervous system is very appealing, however.

I think he is half right in saying that the key question of the economy is moving from production to distribution. For sure, distribution matters. I think that is one reason I've found myself looking so much at political philosophy so far in this blog.

It also underlies the huge controversies on Capitol Hill about taxation and the size of the state. Income redistribution in the post-war liberal way is increasingly unviable politically, for reasons I've discussed.

But more important than distribution is the question of what we want. What is our purpose, what are our preferences, what do we want out of the economy? Simply redistributing dollars is no answer at all. Instead, it is about the ways of life we lead.

Friday, October 7, 2011

Lingering effects of unemployment

This is a quite terrifying post by Megan McCardle at the Atlantic. She referred back to it today when discussing the Occupy Wall Street protests. Written in 2008, she talks about her experience of unemployment in the early 2000s:

For the next eighteen months, I struggled to find a job, in the teeth of a recession that kicked MBAs especially hard. It was awful in a way that is difficult to describe to anyone who hasn't been unemployed long term; the thing makes you question everything about your life. I remember going to see Avenue Q on a date, and writhing in humiliation, thinking that my date must be identifying me with the aimless failures on stage. I was 29 years old, and living at home. I had money--I always managed to work. But as far as I could tell, I had no future. ..

It took me a long, long time to crawl out of that hole. I'll never make what I expected to make as a consultant. I'll never have the job security that I had learned to expect in the pre-9/11 world. The universe will always seem a potentially malevolent place to me, ready to unleash some unknown disaster at any moment.

Things are very hard indeed for people in their 20s right now, weighed down with student debt and few assets. G and I discussed the Wall St protests last night. Are they just standard left-wing puppet theater? Or a sign that a generation is losing touch with the America dream, and it is a much deeper if vague and inchoate awakening?

Worst financial crisis ever

This is really not a good sign. Mervyn King, the Governor of the Bank of England, generally quite a dry academic type, says the outlook is not good (as the Bank launches another round of quantitative easing.)

this is the most serious financial crisis at least since the 1930s, if not ever.

A thousand little companies reduced to a few survivors

This fascinating archive piece turned up in an Atlantic tweet the other day, probably because they thought it was relevant to discussion of Steve Job's legacy. James Fallows writes in July 1982 about how he bought a computer to do word-processing, after spending near 24 hours straight retyping a 100,000 word draft to hit a deadline.

On one level it is just a colorful historical artifact, as he explains to his readers what a computer is and what word processing means.

When I sit down to write a letter or start the first draft of an article, I simply type on the keyboard and the words appear on the screen.

But what is also interesting is the astonishing machine he uses to write on, a Processor Technology Sol-20, with a hefty 48K of memory.

Never heard of it? Nor me. The company that made it apparently went bust about six months later.

And there were dozens of such companies. Says Fallows:

The microcomputer industry these days is like the auto business in 1910, with a thousand little hustlers trying to claim a piece of the action. The next time you feel depressed about the vigor of the American economy, pick up a copy of Byte—or Personal Computing, or Popular Computing, or Interface Age, or InfoWorld —and look at the columns upon columns of ads from small-time companies with new products to sell.

There is Tandy and North Star, both of whom make odd things called 'Disk Operating Systems' or DOS. There is IBM with its new PC. Radio Shack and DEC and Commodore and Osborne make computers.

Over the past few months, in the interests of thorough research, I have tried computers by Apple and Zenith, Victor and Vector, Digital and Wang, Superbrain and Radio Shack, Atari and North Star, to name just a few.

Towards the end he mentions a company called Apple, which he says is one of the best known- but he doesn't like the Apple II's keyboard.

He never mentions Microsoft.

It can be very hard indeed to tell which out of a cluster of small new companies is going to make it. I looked up "Processor Technologies" on Wikipedia.

Processor Technology Corporation was a microcomputer company founded by Bob Marsh and Gary Ingram in April 1975.

It could have been - on one morning in a garage in 1978 or 1980 - Bob Marsh and Gary Ingram who were destined to grow the largest company in the world and be lauded and remembered in every newspaper on the globe.

All new innovations tend to produce waves of dozens or hundreds of new companies like this, and then consolidate down to two or three survivors. The auto industry was the same in the 1910s and 1920s, as Fallows says. Search technology was the same in the late 1990s. Remember Excite, Nothern Light, and of course Altavista?

It is the evolutionary nature of capitalism that I discussed way back in July, here. It generates variation, and then the market selects the fittest.

It can be quite brutal. While we remember Steve Jobs, maybe we ought to remember all the thousands of other computer entrepreneurs in the 1970s who did not end up as billionaires.

The Stagnation of Innovation?

Another great column this morning by David Brooks who wonders whether innovation is stagnating. iPads and the internet are amazing, sure. But where are the flying cars and Martian colonies and cures for cancer (like the pancreatic cancer that killed Steve Jobs) that we were promised?

It's not just a matter of technology, he says, but evolution in the culture. Steve Jobs combined elements of 1960s hippiness, 1970s Silicon Valley nerdiness and corporate America.

The roots of great innovation are never just in the technology itself. They are always in the wider historical context. They require new ways of seeing. As Einstein put it, “The significant problems we face cannot be solved at the same level of thinking we were at when we created them.”

As Brooks says, this stagnation is becoming an increasingly common theme in discussion. Tyler Cowen writes about it in The Great Stagnation: How America Ate All the Low-Hanging Fruit of Modern History, Got Sick, and Will(Eventually) Feel Better.

One additional point Brooks and others make is science fiction has become moribund. It has become about dystopias, not new gee-whiz visions.

Maybe fiction and imagination are very important to creating the cultural resources for progress, or at least as an index of the state of the culture at a point in time. Something like Margaret Atwood's Oryx and Crake doesn't inspire much hope.

Thursday, October 6, 2011

The future of the book

Meanwhile, everyone is not as happy with economic developments as Apple stockholders. Sam Harris discusses the future of the book in the Daily Beast. He admires an article Christopher Hitchens has just written in Vanity Fair:

Vanity Fair has a print circulation of around 1 million copies; the current issue has a fresh photo of Angelina Jolie on its cover; and Hitch is one of the best writers to ever draw breath. However, I’m reasonably sure that this blog post, or the next one, will reach more readers than his latest gem. For bloggers like Ferriss and Godin, the future arrived long ago: Publishing in Vanity Fair would be tantamount to burying their work. This is astounding.

A blog can get more hits than a major traditional magazine. The economics of short e-books make them difficult to sustain, but fewer people have the appetite for a full book.

Maybe this is also an example of the power-law winner-take all model which is growing in many industries - a few massive size concerns, and then a long long tail of smaller and smaller sites or blogs or organizations. A few category killers, and then an infinity of smaller niches, with open access and unpredictable success.

How people discover new things and direct their attention is at the core of the new economy.

Steve Job's View of Work

Steve Jobs died yesterday, and e whole country seems to feel the loss. From the Atlantic, how Steve Jobs thought about work. You should do what you love.

At the same time, Jobs the man embodied a new way to think about work, countercultured in the petri dish of the Bay Area in the 1970s. The point of work was not to create glory for the country. The point of work was not to advance slowly up the corporate ranks until you got a watch and a retirement party. No, the point of work was self-fulfillment. Your job should provide nothing less than the completion of yourself. You should do what you love, Jobs urged in his famous 2005 Stanford commencement speech. "Your time is limited, so don't waste it living someone else's life," he urged the students. And yet to produce Apple products requires that thousands of workers flawlessly execute Jobs' business plans, which is to say his life.

Of course, it was better to Be Steve than to work for Steve. Other people may have done whatever it took to please him, rather than what they loved. But few can doubt he changed the world in significant ways.

Wednesday, October 5, 2011

Gratuitous Extra Photo of Miami

Art Deco Architecture on Ocean Drive, South Beach. In the 1980s South Beach was a crime-ridden run-down area, with dilapidated and outmoded buildings.

Now the beautifully restored 1930s architecture gives a young city a sense of place and history and character. People want beauty and a sense of something unique. And if you do it right, you get huge wealth in real estate.

The Experience Economy

How are we supposed to make sense of changes in the economy? One of the best perspectives I've read recently is The Experience Economy: Work Is Theater & Every Business a Stage by B. Joesph Pine and James H. Gilmore , a business classic from 1999.

They begin with a vivid example. The cost of the coffee in your morning cup is about 1 or 2 cents a cup when it is bought as a commodity on a wholesale commodities exchange. When a manufacturer grinds and packages it and sends it to the grocery store - turning it into a good - the price of your cup is about 5 to 25 cents.

Buy it in an ordinary diner, a standard service offering, and it will cost you 50 cents to a dollar.

However, when you buy it in Starbucks with elaborate extra brewing and preparation and pleasant surroundings, it's $3. In a five star hotel after dinner, $5 or $6.

And if you order it at Cafe Florian in St Mark's Square, Venice, sitting in the crisp morning air immersed in the visual splendor and sounds of one of the most beautiful spots on earth, you willingly pay $15 for that same cup that is worth two cents as a commodity.

Experiences are vastly more valuable.

This progression of value is all the more important and urgent, because they argue most existing goods and services are getting commoditized. They are getting standardized and automated and turned into the equivalent of that 2 cent coffee.

Commodities are fungible "stuff" which can't be differentiated beyond basic grades - for example, one barrel of sweet crude oil is much like any other. The only way to escape this relentless downward pressure on prices and profits is to rise up the progression of economic value.

Civilization started off with commodities, like grain and olive oil and tin. They are fungible . The material itself is the offering.

Next came goods, invented and manufactured products, which are tangible. The product is the offering.

Then comes the service economy, where you add more value by performing an activity on behalf of someone. The value becomes intangible. The operation and procedures are the offering. Starbucks finds the best arabica beans, grinds, tamps and serves you your perfect Cafe Mocha with a caramel swirl. GE offers financing and maintenance contracts with their jet engines.

So far so normal, as these cover the major categories in national accounts and economic statistics, even if the service sector is much more sketchily covered by data. We largely live in a service economy.

The next level, and the book's distinct contribtution is where companies need to go next, - providing experiences. Experiences are memorable. The event is the offering. It is about engaging the customer.

The focus is on the experience customers have while using the good, not the features of the good itself (which sounds very like a key to Apple's success). It is about developing scripts for an encounter, and it borrows a lot from the theater. Experiences are staged. They can be entertainment. esthetic, educational or escapist, depending on the degree of immersion and active participation.

That leads off into a number of rather unpersuasive chapters about how companies can learn from the theater, which get quite tiresome.

They conclude by arguing there is one stage beyond experiences, which do in fact have some weaknesses. Companies like Rain Forest Cafe which stressed an immersive experience around the food found it hard to get repeat business. Once was enough for many people, who looked for the next novelty.

The next and final stage in the progress of economic value is transformations which are about changing individuals permanently.

When you customize an experience to make it just right for an individual- providing exactly what he or she needs right now - you cannot help changing that individual. (p165)

The individual him- or her-self is the offering, rather than a product or an event.

It is all about guidance, and crucially dependent on new aims and purposes and perseverance. This is where the highest economic value can be created. Even management consultancies realize it is no longer enough to sell a service, but they have to achieve a permanent transformation for their clients.

If services are about charging for activities you execute and experiences are about charging for the time customers spend with you, then transformations are about charging for demonstrated outcomes.

Nothing is more important, more abiding or more wealth-creating than the wisdom to transform customers. And nothing will command as high a price. (p190)

They quote Virginia Postrel:

We are , in fact, living more and more in an intangible economy, in which the greatest sources of wealth are not physical. We aren't yet used to an economy in which beauty, amusement attention, learning, pleasure, even spiritual fulfilment are as real and economically valuable as steel or semiconductors. (p187)

I find much of what they say illuminating and persuasive. G and I spent over $400 on dinner at Le Bernardin earlier this year - a hundred times what it would cost us to eat at home. And we felt we got good value because it was a very memorable experience. We will talk about and remember it for years to come. We weren't really thinking of the price, but the fact it was a peak experience.

But we wouldn't go to Le Bernardin every day. And it will be a long time before we go back, if ever - because there are so many other spellbinding dining experiences to try first, not to mention all the places we want to go and things we want to do. You can't run an economy and employ millions of people on the basis of running one of the ten best restaurants in the world, or similar extraordinary experiences.

What's more, many of the best experiences are free, or close to it. Natural beauty, friends, family, looking at art. The cost of entertainment and stimulation tends to get lower over time, even if total spending as a proportion of income on those categories rise.

The book argues that "The history of economic progress consists of charging a fee for what was once free." (p67). I just don't think this is true. Yes, people are more likely to hire a plumber now for specialist activity. But they are more likely to carry out many activities themselves - painting the wall, booking their flights to Miami on Expedia, or figuring out why the router won't work because it avoids hours on the phone to tech support.

The education process itself may get automated and commoditized with technology, at least for standard offerings. You may not be able to automate Harvard or Oxford. The business course at the local community college - maybe.

I completely agree with their "progression of economic value" model. The problem is that the higher levels aren't necessarily more expensive. You could argue theater itself, their paradigmatic experience. has become commoditized compared to a hundred years ago, when there are two hundred channels of drama on Time Warner Cable and several thousand movies on Netflix. People will pay a lot for peak experiences, like the Royal Shakespeare Company or seeing Les Mis on Broadway. But for ordinary experiences they'll just hit the remote control and see what ABC has on.

The highest stage, transformation, also sounds very much like the traditional role of education and the churches - which have not traditionally been associated with automatic wealth (although, granted, the selling of indulgences was a cunning move).

All that said, it is one of the most persuasive books I've read about where future sources of value lie as the economy evolves away from basic goods and services. But these new stages of economic value may not actually employ many people.

Change of Pace Photo

Ocean Drive, Miami, FL

Will Robots Steal Your Job?

"Software could kill lawyers." says Slate. "Why that's good for everyone else."

While legal automation will be a boon for those who can't afford representation, it's bad news for lawyers. The industry is already in a slump, and law school is no longer seen as a sure path to riches. Because software will allow fewer lawyers to do a lot more work, it's sure to drive down both price and demand.

This underlines the continuing theme that technology could remove a lot of routine white-collar jobs. And it could happen quite quickly, once the software reaches a threshold where it can perform well.

Jumping hoops to get into college

So we got home OK, if two hours late and past midnight.

Here is a scary story about the meritocracy going wild in university admissions in the NYT.

“It used to be that if you were editor of the paper or president of your class you could get in almost anywhere,” Mr. Singer says. “Now it’s ‘What did you do as president? How did you make the paper special?’ Kids file stories from Bosnia or El Salvador on their summer vacations.” Such students are known in college admissions circles as “pointy” — being well-rounded doesn’t cut it anymore. You need to have a spike in your achievement chart.

Kids learn to jump through hoops held out by others, to the exclusion of all else.

Monday, October 3, 2011

Blogged from Seat 12F

So we are sitting on a delayed flight home from Miami. Mechanical problems with the airplane.

We were watching the new fall tv show Pan Am last Sunday, which represents a very glamorous take on air travel in the 1960s.

Now, not so much. It's one part of modern life which has got much cheaper - but commodified, security-processed and made a little like livestock processing. ho hum If it wasn't cheap, we wouldn't go to Miami for the weekend.

We'll just be pleased to get home tonight at this rate.

The History of Leisure

We were out swimming in the ocean this morning again. There is something so pleasing about the surf and the waves and the light. Beaches have an almost hypnotic attraction for so many people.

I wonder when that started, though. I doubt it was any earlier than the late 19th century. Spas go back earlier, no doubt. I'm thinking of a book on my shelf, Witotld Rybzinski's Waiting for the Weekend, which will probably have the answer.

One thing we don't get enough of in New York is nature. There were pelicans and seagulls swooping and diving for little minnows in the shallows near us. And the magnificence of the ocean itself is stirring, even if the shoreline is built up with towers for fifty miles in either direction.

One Iconic moment

I had a wonderful time sitting on the balcony here in Miami Beach late last night. G was inside sleeping, I had a bottle of wine in an ice bucket, a glass, and the ipad. It was completely dark, just the sound of the waves crashing and a soft rain falling off in the darkness. I downloaded a kindle book with 72 classic works of philosophy and ended up reading bits of the Nichomachean Ethics of all things. The Golden Mean and a glass of wine and the ocean.

Sunday, October 2, 2011

What makes a place your own?

We are staying in a hotel room in Miami Beach. I'm thinking about why you would want to own a condo here full-time instead, especially if you could only use it a few weeks, or at most month, a year.

Let's discount the investment value, because, certainly in this area, there hasn't been much investment return recently. Quite the opposite.

An important part of what makes a place your own is you have your own possessions and things around you, your own books, music and other collections of things you amass over time.

We have a jam box in our room, and two ipads. That means we can play a large proportion of our entire music collection at will, in a completely different place. We have books on our kindles. We have full internet.

It blurs the boundaries of what is your own long-established space and what is borrowed space. You can take digital possessions anywhere.

Of course, if it was our own condo we would have art on the walls and plants and little sculptures, candles, cups, wine glasses.

We would have a fully equipped kitchen.

But having a large slice of our own books and music here makes any place seem more like home. We can rent beautiful surroundings - an ocean view, a balcony -- for a quick refresh. We don;t need it all the time.

We think more in terms of renting places for a week or a month in the future, through sites like, rather than buying a single vacation home. Any place can be ours for a few weeks.